How I report the sale of MLP shares in Turbo Tax. I sold all shares.

[rona11]

@nexchap I thought I am all good but found quite a trouble when I check the NJ State Tax after the two K-1's input. I know this may be a NJ specific problem but I also hope such issue may be encountered somewhere else. For USO K-1 (100% disposal in 2020, all short term), due to a big adjustment (-$48K) of cost in K-1, it created a similar amount (48K) of Cap-gain in 8949 but was offset in Schedule D with the business losses reported from K-1, all come out correctly with a $-1830 capital loss. However in NJ State Tax, the capital gains and Business (operation) gain/loss are reported in two different forms, which are then rolled into NJ1040. The problem is, for the business operation part, gain and loss can offset between businesses but will not be allowed to show up in NJ1040 if it's a net loss (which is the case here, -$48K). In the end I end up with a 48K cap gain, instead of 1830 loss.  I am wondering if I can adjust the USO unit basis in JNJ return to reflect the true purchase price (no "ordinary gain" in K-1 Sale Schedule) but it will be inconsistent with Federal return.  BTW, a formal document about NJ tax of partnership says "Losses - You cannot offset a loss in one category of income against income in a different category. You cannot carry losses forward or backwards from one year to another on your Income Tax return", which means I have no way to actually recapture the loss later, but have to pay the "fake" cap-gain? Appreciate any light you or anyone else can shed on this matter!  

[nexchap]

@rona11 Sorry, but I don't have any experience with the NJ return.  You may get more eyeballs on the problem if you post as a separate where NJ tax experts may see it.

With that said, you mentioned "offset in Schedule D" but I assume you meant "Schedule E"?  Just to make sure I understand, when you went through the calculations you wound up with a $48,000 Capital Gain (which shows up on Sched D) but also a $49,830 loss which showed up on Sched E.  Between the two, they net to the 1,830 loss you mention.  Is that correct?  If so, then I have no idea what NJ is doing.  But if that's not right, then maybe there's a problem in the way you handled the transaction at the Fed level.

[rona11]

@nexchap Thanks, I will try to find a NJ one for help. Meanwhile, your question about Federal level handling is critical. I hope you can help me double check here:

- Due to the cost basis adjustment in K-1 sales schedule (-$48453), I end up with a $46622 cap gain in Schedule D via form 8949 after adjusting the 1099-B cost basis ($1831 loss before adjusting).

- There is a $-48439 loss in K-1 line 11 ("Other income/loss") code C ("Sec. 1256 contracts and straddles").  This loss is then rolled up in Schedule D in line 4C(-19376 for short-term loss)  and 11D (-29063 for long-term loss) via Form 6781 which splits the loss in 40/60 ratio for short-term and long-term losses.

- In Schedule D, the 46622 cap-gain is offset by the 48439 loss, resulting in a1817 loss. The other $14 loss is from Schedule E, adding $20 income/dividend from K-1 line 5 and 6a, deducting $34 in 11W  ("Other deduction", here for "Trader expenses" according to USO K-1).

- In net (between Schedule D and E), it generates a $1831 loss, which aligns well with 1099-B loss before adjusting the cost basis.

Pls let me know if you notice anything suspicious above. Thank you in advance!  

[nexchap]

@rona11 Your clarification makes sense.  It looks like the handling on the Fed side is correct.  So you may have just run into some sort of strange NJ income matching rule.  Hopefully you can get some help from a NJ expert.

FWIW, your $48k Cap Gain isn't really "fake".  What the K-1 is telling you is that your partnership declined in value during 2020.  It was investing in stuff, and lost a bunch of money ($48,439).  It was worth a lot less at the end of 2020 than at the beginning.  That's the loss on 11C.  But then you got lucky.  Even though the business was worth less, you managed to sell it for almost what you paid for it.  That's the $48k Cap Gain.

So that obviously doesn't make you feel any better if NJ taxes you on the Cap Gain but refuses to give you a break on the business loss, but hopefully it helps explain why the tax authorities force these nuances.

[rona11]

@nexchap Thank you for helping to understand the concepts of loss/gain in this context. Appreciate it! I am also not quite sure I understand the "Gain to be recaptured as ordinary income" part of the sales schedule. Do it imply the "ordinary gain" I earned (not necessarily distributed to me) for the part/units sold in 2020? For the income earned for the unsold units, they are reported in the other parts of K-1 eg Box 1?

I also saw the following two requirements from K-1:

1. you must include the IRC Section 754 Statement below in your income tax return for the first year you
become a partner.

2.  If you are reporting ordinary income attributable to sales of Partnership units, you must include the IRC Section 751 Statement below in your income tax return for the year you made the disposition.

I did not find a place I can insert the two statements during TT interview. Do you have any suggestion?

Thank you, once again!

[nexchap]

@rona11 

For the 751 and 754 statements:  In Forms mode, open a "blank" form.  You can then type the info there.

As to recapture, you can find some good, lengthy discussions of exactly what this is on the web.  But briefly, the IRS taxes different types of income at different rates.  Rates can be different for long vs short term capital gains, ordinary vs qualified dividends, regular income, etc.  Because of that, people play all sorts of games to try to classify their income into the lowest tax rate possible.  In partnerships, with the right mechanics, it was possible to reclassify income that should be treated as regular, highly taxed, ordinary income into lower taxed capital gains.  So the IRS figured that out and put in rules that forced partnerships to knock it off.  Instead, after you've figured out the difference between your revenue and adjusted cost, the partnership is forced to tell you how much of the difference gets to be treated as capital gain, and how much is ordinary income.  That's what the recapture line does.

[rona11]

@nexchap Thank you so much for the further information and explanation! You are a great help of this challenging tax season (new to MLP). 

[vic201087]

@nexchap is the MVP! I've read thru all the 18 pages, and now have a much clearer picture of what I've gotten myself into with my MLPs.

I do have a question. Last year I've purchased some preferred stock from ET and received some distributions that they coded as guaranteed payments for capital on line 4b. Looks like these are fully taxable unlike normal distros ET and its subs put out. I did sell about 1/3 of my position late 2020, but K-1 itself does not have any sales schedule info. taxpackagesuppport, however, has a drop-down that does show ordinary gain total, but nothing else. I did go ahead and follow your advice in the OP and included that total as an ordinary gain on the K-1 interview (+ord gain, -partnership basis), and adjusted my capital gains on 1099-B via increase in basis there. Should I contact them to make sure there was no other basis adjustment?

Box L included my contributed capital, then added the above line 4b amount, and subtracted the distributions/withdrawals, but it appeared they've counted the distributions I've received as a positive amount on the distro/withdrawal line, so it appears it counts as both income and position on distro line (my basis would've been up significantly if not for my sale). Does that make sense?

P.S. Not sure if against the community rules, but I'd love to offer up a tip for all the great advice you've been providing to people on here. PM me with your paypal details or something, and I'll send over some beer money 🙂

[nexchap]

@vic201087 The thread has definitely gotten rather long.  I think it started back in 2014, when I first had to figure all this out.  And then just grew.  Fortunately, it all ported over when TT changed the forum.

On the sales schedule, I'm not familiar with how the preferred series report, so am not sure what you should expect in a sales schedule.  But it certainly can't hurt to contact taxpackagesupport to verify that nothing else is coming your way.

On box L, I'm not sure I follow your description, but in general the capital reconciliation does two things:

• If the partnership forces you to report income that you didn't actually receive (e.g., line 5 interest income), and pay tax on it, it increases your capital account.
• Similarly, if the partnership gives you a benefit (e.g. charitable deduction) OR actual cash (like the normal ROC distributions), it reduces your capital account.
• The above are both done so that when you eventually sell the calculated gain reflects all these wins and losses over the years.

In the case of a dividend from preferred shares, on which you're paying tax, I wouldn't expect any impact on your Capital Account:  you received cash, but also paid tax.  No adjustment should be needed when you eventually sell.  So if that's what happened, it makes sense.  If its not what happened, then I'm misunderstanding something.

And I really appreciate the thought on beer money, but 2020 already had me drinking too much.  Toss a little extra towards the next charity you run across, and I'll just enjoy the reflected Karma!

[vic201087]

@nexchap thank you for a quick reply!

In box L, under withdrawals, I expected to see my sales amount + distros received as the negative amount, but instead, the amount was sales minus the distros received. See below. $387 is the amount of distros/payments for capital. My sales were right around $2,170 per my 1099-B. 

Appreciate it once again.

[nexchap]

@vic201087 The "withdrawal" part of the withdrawal and distribution line won't be the amount you sold for.  It will be the cost basis of the units you sold.  So if your cost basis was $200, and you sold half, you'd see $100 on that line regardless of what you received.

[vic201087]

that's the thing, this k-1 does not tell me anything about my basis (no sales worksheet), so i'll need to contact them on Monday. the withdrawal/distro amount equals exactly my sales receipts minus the distros/capital received ($375), tho. thanks once again!

p.s. i must've gone thru at least 10+ K-1s since I've posted my initial post. Most were complete dispositions, so were very simple, but this thread is a gold mine!

[J295]

Hi Nexchap. @nexchap 

I'm working on this now and would really appreciate your insights:

1.  I can add the increased negative basis as LTCG  by inserting the amount on line 9a of the K-1 as you suggested.

2.  Next then I need to find a way to release the suspended losses in an equal amount (as is proper per the article from Forbes provided), which should then show as reduction of ordinary income for net zero effect.  I am keeping good records.  Any suggestions on how I can show using the same amount of loss  (from the cumulative passive losses of the K-1) to offset the gain, which is the result needed.  

Guess I'm really asking how do I get the correct amount of the cumulative loss to show up ?

Thanks.

PS  From prior post and sorry I can't link very well .... 

this link, which at example 7 states that the cumulative losses can in fact be used to offset the long term gain from the basis going negative.  FYI.

https://www.forbes.com/sites/baldwin/2018/02/14/2018-tax-guide-to-mlps/

[nexchap]

@J295 I assume you've verified that you actually have negative basis (not negative capital account).  They're different, and I only ask because I've seen this confusion recently and I know EPD allocates nonrecourse liabilities.

As to how to get TT to release losses to offset "Distributions in Excess of Basis", I haven't had to personally try to do that (or to grapple with making sure Form 6198 is doing what its supposed to do) so can't offer step-by-step instructions.  I'm not even sure that entering numbers into 9a will work perfectly (K-1 data triggers a lot of different forms and adjustments).  My suggestion would be to save a version of your tax file BEFORE adjusting for the excess distribution, then try making adjustments and verify that the AFTER result only changed the correct forms / numbers.  Note that you can see how much loss has been released, and the calculations TT is doing, in Forms Mode by looking at Section A of the K-1.

[J295]

Thank you @nexchap 

Now I'm wondering ... since the net impact is zero, with a LTGC (due to negative basis for the year), and corresponding loss due to using an equal amount of the cumulative losses, am I required to even do anything other than just keep track of the basis and losses on my own records so long as the losses exceed the gains each year?  

Note:  Now the cumulative losses greatly exceed the yearly LTCG due to negative moving basis, and I intend to liquidate all this year to eliminate these issues.

Thanks!